Japanese speedboats tell us how women and men compete

What would an economist know about Japanese speedboat racing? Why would they want to know? Ah, that would be telling.

It’s a spectator sport that’s hugely popular in Japan, but little known elsewhere – perhaps because it’s so Japanese. That’s to say, odd to Western eyes. Even its fans admit it’s more mesmerising than entertaining.

It’s been going only since 1952, but is held most days in 24 locations across Japan. These “stadiums” are built on lakes, rivers or the sea, with others on artificial concrete ponds in the midst of cities. The course is just a 600-metre-long oval.

Each race consists of six boats going just three times round the course, and lasts less than two minutes. But they string it out by having a practice race, and then individual 150-metre time trials before the race.

The boats are quite small, with a detachable engine. They get off to a flying start, with boats that jump the gun, or pass the starting line more than a second late, being disqualified.

As you can see from YouTube, much of the skill comes from manoeuvring into the best position at the start. But being first round the first turn is also important, and usually means you’ll win. What we’d call sledging is another competitive tactic.

All the boats are identical and owned by the stadium, being issued to each competitor for each race at random. Same with the engines. Each driver – all of them professional - gets a short time to tune their allotted engine for better performance. You’re allowed to supply your own spark plug, but that’s all.

Drivers crouch down in the straight to give less resistance, but then stand up, using their body to slow the boat for the turn. They crowd so close together on the turns it’s amazing more of them don’t collide.

Why do so many Japanese get so excited about all this? Sorry, didn’t I mention it? Speedboat racing is one of the few sports in Japan on which it’s legal to gamble.

Extensive statistics are kept on the past performance of drivers, boats and engines to help the punter with their bets. All the race preliminaries are there to give the punters more information before they place their bets.

But why would any this be of interest to economists? Well, as you may know, economists are great believers in competition, and are curious about how it works.

In this case, however, there’s another attraction. Japanese speedboat racing involves competition between men and women. Better, competition between men and women in the same races, but also all-male and all-female races.

There is great controversy over whether men and women are equally competitive or women are, in general, less competitive. And, if less competitive, whether this is innate or is learned behaviour.

Many people’s answer to these questions is based on their beliefs (and some use social media to tear into those who say things than conflict with their beliefs) but these days, surprisingly, academic economists search for empirical evidence to shed light on such controversies.

Which means academic economists spend their days searching for good “data sets” of empirical information to which they can apply their statistical tests and reach conclusions about issues of interest.

Guess what? In speedboat racing those meticulous Japanese have produced a fabulous data set with which to compare the competitive behaviour of men and women.

The more so because, though men outnumber women by more than seven to one, they all receive their one-year training at the same college and are treated equally in the race, being randomly assigned to races. In mixed-sex races there’s usually one woman and five men.

Such a “natural experiment” with real drivers competing professionally for big money is far more persuasive than some lab experiment where student volunteers compete for tiny amounts.

Two economics professors, Alison Booth of the Australian National University, and Eiji Yamamura of Seinan Gakuin University in Japan, have examined more than 140,000 individuals’ racing records in a study.

They found that women’s race times are slower in mixed-sex races than in all-women races, whereas men’s race times are faster in mixed-sex races than in men-only races.

In mixed-sex races, they found that men were more aggressive – as shown by lane-changing – in spite of the risk of being penalised if they contravene the rules, whereas women followed less aggressive strategies.

So the same woman performs relatively worse in mixed-sex races compared with single-sex races, while for the average male racer the opposite is true.

This shows that female competitive performance – even for women who have chosen a competitive career and are very good at it – is enhanced by being in a single-sex environment rather than in a mixed-sex, in which they are a minority.

But they found no difference between the genders on number of disqualifications. So while male racers do more lane-changing than females, the men are no more likely to be caught.

“We suggest that gender-differences in risk attitudes and confidence may result in different responses to the competitive environment, and that gender-identity is also likely to play a role,” the authors say.

According to the “gender-identity hypothesis”, a society’s prescriptions about appropriate models of behaviour for each gender might result in individuals experiencing a loss of identity should they deviate from the relevant code.

The gender imbalance in mixed-sex races may trigger awareness of gender-identity for both men and women, and this may go some way to explaining each gender’s different behaviour in mixed-sex races to same-sex races.

“For example, a man’s gender-identity may lead him to consider being defeated by women to be more dishonourable than by men, and he will try to avoid it,” the authors conclude.

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Weak competition may be key to economy's problems

If you think there isn’t enough competition between the big four banks, the big three power companies, the big two airlines, the big two supermarkets and in a lot of other industries, Andrew Leigh agrees with you.

He has evidence the “concentration” within our industries is increasing. What’s more, he thinks it could be part of the reason we – and the rest of the developed world - are suffering from slower economic growth and productivity improvement.

Dr Leigh is a Harvard-trained former economics professor at the Australian National University and now the federal opposition’s spokesman on competition.

In a speech this week, he said it’s hard to think of many Australian industries these days that aren’t dominated by just a few behemoths.

“Whether it’s Coles or Woolworths, Lion or Carlton, Caltex or BP, Medibank Private or BUPA, Qantas or Virgin – it seems consumers don’t have a great deal of choice where they get their goods and services from,” he says.

A standard measure of concentration judges an industry to be concentrated if the top four players control more than a third of the market.

With the ANU’s Dr Adam Triggs, Leigh calculated this measure for 481 Australian industries, finding that half of them were concentrated.

“In department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, internet service providers, baby food and beer, the biggest four firms comprise more than 80 per cent of the market,” Leigh says.

(Of course, concentration isn’t a foolproof way of measuring the degree of competition. For instance, the two big newspaper companies – one of which owns this august organ – face competition from a huge number of digital news providers. And competition from more specialised retailers makes it seem department stores’ days are numbered.)

Economies of scale mean our small market is more concentrated than big economies. Leigh says our commercial banks, petrol retailers and liquor retailers are more than three times as concentrated as those in the US.

Our department stores, airlines, soft drink manufacturers and cardboard box makers are all significantly more concentrated.

As a general rule, greater market concentration gives the small number of big firms increased “market power” – ability to influence the prices they charge. It may also give them power to extract lower-than-reasonable prices from their suppliers.

Leigh notes American evidence that big companies in concentrated markets were almost 20 per cent slower in paying their suppliers than small companies were.

As to anti-competitive behaviour more generally, Rod Sims, boss of the Australian Competition and Consumer Commission, said recently that “many well-known and respected major Australian companies have admitted, or been found, to have breached our competition and consumer laws. These same companies regularly [claim] to put their customers first”.

In reaction to the growing market power of our big firms, Leigh says, governments have added civil fines for unconscionable conduct, criminalised the forming of cartels, and increased penalties for breaches of consumer protection laws.

Another problem is poor regulation of monopoly businesses that have been privatised. “Whether it is a port or an airport [or, he could have added, an electricity transmitter], it is important that governments ensure that the gains to taxpayers from selling an asset aren’t offset by the losses to consumers from higher prices,” Leigh says.

He notes that, in 2008, the ACCC received about 34,000 complaints by consumers. By 2016, it was closer to 60,000.

But why are Australian markets so heavily concentrated, and probably becoming more so? Partly because of a decline in the rate at which new businesses are being created: from an average annual rate of 16 per cent before 2010, to 13 per cent since then.

But also because of a big increase in company mergers and acquisitions. Between 1992 and 2017, their number increased almost five-fold from 394 a year to 1960 a year.

An international study has found that, in Oz, the average prices charged by large, stock exchange-listed firms were close to their marginal cost of production in 1980, and stayed there until the late ‘90s.

By the early 2000s, however, they’d risen to 40 per cent above the marginal cost. By 2010, they were 50 per cent above and by 2016 they were 60 per cent above.

In the US, there’s growing evidence that market concentration may be suppressing business investment. One study found that 80 per cent of the decline in US investment since 2000 can be explained by less competitive markets and increased ownership of shares by institutional investors.

As top US economists Paul Krugman and Larry Summers have said, the odd combination of high company profits but weak investment (at a time of low interest rates and high share prices) is just what you’d expect to see if market power was increasing.

Leigh says weak competition may help explain why wage growth is weak here and in other developed countries. “Wages are fundamentally driven by the competition between firms for workers. Less competition means lower wages,” he says.

A British study by Professor Stephen Nickell, of Oxford, found that a 25 per cent increase in market concentration leads to a 1 per cent fall in productivity.

An American study of detailed data at the firm level for all US manufacturing industries, found that mergers were associated with increased price mark-ups, but there was little evidence they boosted productivity.

Leigh concludes that “Australia has a competition problem: there is not enough of it. Our industries are concentrated. Anti-competitive conduct is rife. Our consumers are treated poorly.

Our markets show the signs of weak competition. "There has been a massive increase in mark-ups among large listed firms over the past two decades.”

What to do about it? We shouldn’t adopt an "overly permissive" approach to company mergers. We should take “a more circumspect approach to claims of [greater] efficiency when considering anti-competitive conduct”.

We should give the ACCC the investigatory powers it needs. We should ensure that penalties aren’t so small they can be treated as just a cost of doing business.

We should consider the impact of anti-competitive conduct on innovation, and recognise that unchecked market power can harm workers as well as consumers.

Sounds to me like an election manifesto.

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Why so many businesses are behaving badly

While we digest the royal commission’s evidence of shocking misconduct by the banks and insurance companies, there’s another unpalatable truth to swallow: they have no monopoly on bad behaviour.

It seems almost everywhere you look you see examples of companies behaving badly. In a major speech he gave a few months ago, the chairman of the Australian Competition and Consumer Commission, Rod Sims, offered a remarkable list of business household names the commission was taking proceedings against, as I noted at the time.


Commissioner Kenneth Hayne has given us a lawyer’s explanation of why the banks misbehave, but Sims’ speech offers an economist’s explanation.

It’s an important, though sensitive, question for economists since their simple “neo-classical” model of markets predicts firms won’t mistreat their customers because, if they did, they’d lose them to a competitor.

Sims offers seven reasons for this evident “market failure” – a term economists use to acknowledge when real world markets fail to deliver the benefits the textbook model promises.

First, he says, meeting customer needs may not be the main way companies succeed.

On the supply side, markets and economies are driven by the desire of firms to earn and grow profits. (On the demand side, markets are driven by the self-interest of consumers seeking the best deal they can get.)

Nothing wrong with that. Indeed, it often means that those businesses best at meeting the needs of consumers over the longer term do best and survive longest.

“However”, Sims concedes, “being the best at meeting the needs of consumers is not the only, or even the dominant, way firms succeed. Staying ahead of rivals through continual improvement is a difficult task for most companies; eventually, someone [else] works out how to do things better and cheaper.”

“Commercial strategy therefore is largely about building defences against the forces of competition. To make it more difficult for other firms to develop a better product. Or, if they do, to limit their access to customers.” Much of this is perfectly legal.

Michael Porter, the doyen of corporate strategists, from Harvard Business School, demonstrated that firms can best attain commercial success by reducing the number of competitors, by erecting high barriers to new firms entering the market, by keeping suppliers dispersed and weak, by using brands or the bundling of products to create strong consumer loyalty, and by reducing the likelihood of other firms being able to offer your customers products those customers see as substitutable for your product (that is, by “product differentiation”).

Sims’ second reason customers may not get treated well is that executives are under considerable sharemarket pressure to increase short-term profits, so as to increase share prices. Executives’ bonuses are often geared to achieving this.

Many companies set a sales or profit target higher than the growth in nominal gross domestic product, meaning not all of them can achieve it. This can induce some executives to push the boundaries and ignore the risk of reputational damage over the longer term.

Third, in some markets poor firm behaviour goes unpunished by customers. This can be so because customers don’t see what’s been done to them – that they’re being misled, or that firms have formed an (illegal) cartel to keep prices high.

Or it can happen because customers don’t have viable alternative products to turn to. Or switching to another provider may be too difficult or costly. Firms may deliberately make it hard to compare their product with their competitors’.

Fourth, competition can become a race to the bottom rather than the top if firms gain a competitive edge through poor behaviour that goes undetected and unpunished. Stay pure and you lose business. A firm can know it’s bad practice, but not be game to be the first to stop doing it.

Fifth, companies may give their staff financial incentives without adequate safeguards to prevent mistreatment of customers.

Companies can establish poor business models, such as arrangements that leave franchisees little room to achieve a return on their investment while paying their workers award wages.

Sixth, customers can consider themselves badly treated when firms (including banks and power companies) engage in “price dispersion” – charging new customers a lower price than existing customers – which is a common practice and perfectly legal.

Economists have often judged this to be a good thing - “welfare enhancing”. But Sims notes that such behaviour imposes extra search costs (spending leisure time checking to see that companies you deal with aren’t taking advantage of you) which are a loss to society.

(He could have added than the economists’ simple model assumes away all search costs – an example of “model blindness”, by which economists mislead themselves.)

Finally, customers can suffer if executives’ loyalty to their company leads them to sail closer to the edge of what’s legal than they would in their private lives. If some lawyer tells you it’s not illegal, does that make it honest?

Not surprisingly, the economist’s explanation of why businesses behave badly is very different to the judge’s. But when it comes to what we can do about it, Sims and Hayne aren’t far apart.

Commissioner Hayne’s answer is not to pass new laws outlawing conduct that’s already illegal, but to increase penalties so as to make them a realistic deterrent to big businesses whose size means their misconduct in just one area can earn them huge sums, and then police the law with far more vigour and diligence that so far shown by the financial regulators, including Treasury.

Sims has several suggestions. Increase the "private cost" of bad behaviour by identifying and shining a light on bad behaviour, increasing penalties and continually looking for new ways to increase regulators’ ability to identify and pursue bad behaviour.

Markets will never be as competitive as the textbook model assumes, but Sims says governments should ensure they’re as competitive as possible.

And they should bolster competition on the consumer side by taking measures to lower customers’ search costs – the time and effort needed to find the best deal.

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Punishing wrongdoers won’t fix our problem with banking

The other day I noticed a column I’d written in 1990 saying the banks’ abuse of their customers’ trust was getting them a bad name, so they should desist.

That was almost 30 years ago. It tells you the banks started playing up not long after the Hawke-Keating government deregulated them in the mid-1980s.

I was complaining about the way they’d offer new customers a better deal than their existing customers, then make no effort to tell their unsuspecting suckers they should change.

They’re still doing it, of course. But as the banking royal commission has informed us in the most gruesome detail, they’ve graduated to much worse than exploiting their customers’ loyalty and inertia.

Their policy of buying into every dimension of “financial services”, particularly “wealth management” – running superannuation funds, and giving people advice on where to invest their retirement savings – has opened an Aladdin’s cave of opportunities to charge fees and commissions, plus temptations to exploit the conflict been their interests and their customers’.

“Why don’t I get you to agree to put your money into an investment that pays me a higher commission, or that’s offered by another part of my bank, even though it wouldn’t be the right thing for you?”

Financial services are particularly susceptible to overcharging, not just because the sellers know so much more than we do, but because ordinary mortals find financial details extraordinarily dull and have great trouble making themselves spend their precious leisure time examining statements, closing old accounts and checking up on businesses they should be able to trust.

And now, of course, we’ve had Westpac making an “out-of-cycle” increase in mortgage interest rates, and are waiting to see whether the other big banks will use the chance to raise their own rates.

Will they be game to add further offence while they’re at the height of their unpopularity? I fear they will.

If I’m right, this will tell us a lot about how banking got to be in its present sorry state and how likely the royal commission’s proposals for reform are to change the banks’ bad behaviour.

The commission’s inquiry is nearing its end. Its interim report is due by the end of this month, with its final report due by February 1. So we’re likely to know its recommendations – and what each side proposes to do about them – before the federal election.

Is it reasonable to hope it won’t be too long before the banks' bad behaviour is a thing of the past? Yes and no.

The commission's being conducted by a former High Court judge and a lot of barristers. If these lawyers interpret “misconduct” to mean breaking the law, they’ll be focused on referring suspect banks and individuals for further investigation, tightening up the law and making sure the bodies supposed to be regulating the banks, particularly the Australian Securities and Investments Commission, get more resources and try a mighty lot harder than they have been.

If this is the way things shape - and provided punishments extend to fining or jailing individuals, not just imposing fines on businesses with the deepest pockets in the land – I think we can hope for a marked reduction in rule-bending and outright lawbreaking.

The problem is that the big four banks have been so focused on the game they’re playing that they’ve lost touch with reality – with how many customers’ lives they’ve been ruining; with the way the rest us have come to despise them.

When the spouses of bank chief executives and board members realise their other half risks a trip to the slammer, just watch them pull their heads in.

Trouble is, most of us haven’t been victims of illegal behaviour. It’s no offence to take advantage of customers who aren’t paying attention. It’s not against the law to raise interest rates out-of-cycle.

In other words, there’s a big economic dimension to the banks’ misconduct. Neglect that and we’ll still have much to complain of.

The strange thing about banking is that it’s ruthlessly competitive and uncompetitive at the same time. The banks’ bosses are obsessed by a game in which they compete to achieve the highest percentage increase in their profits and share prices.

It’s this competition that’s kept bankers in their bubble of unreality, urging their minions on with KPIs and commissions and bonuses, and turning a blind eye to the rule-bending they lead to.

This is why Westpac has moved to protect its profit margin by passing a small increase in its costs on to customers, even though our banks are already among the most profitable in the world. And this is why its competitors are likely to follow suit, whatever their customers think.

It’s the lack of price competition at the retail level that makes it possible for the banks as a group to raise their prices whenever they see fit. The others could hang Westpac out to dry, but it’s a safe bet they won’t.

It’s only effective measures to increase price competition that will stop the banks overcharging us. There are no easy answers. But the banks are so influential that, to date, neither the two parties nor their bureaucratic advisers in Treasury, the Reserve Bank and the Australian Prudential Regulation Authority have shown much enthusiasm for the challenge.

That’s what we must hope all the voter anger generated by the royal commission is about to change.

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Competition isn't always as good as we're told

The banking royal commission has many sub-plots. Did you notice the one where a couple of the banks blamed their decisions to keep doing things they knew were dodgy on the pressure of competition?

A chap from Westpac didn’t argue when one of the inquiry’s barristers criticised it for paying “flex commissions” to car dealers arranging loans for people buying cars. The higher the interest rate the dealers could get their customers to accept, the higher the (undisclosed) commission Westpac paid them.

The Australian Securities and Investments Commission has decided to prohibit this practice from November. So why was Westpac persisting with it until then? Because, if it simply stopped doing it off its own bat, it would lose most of its business to competitors.

Another chap, from the Commonwealth Bank, gave a similar explanation for it continuing to base its commissions to mortgage brokers on the size of the loans they organised. If it stopped doing the wrong thing, he said, its brokers would switch to dealing with other banks.

But since it’s a relaxing long weekend, let’s not persist with such a blood-pressure raising subject as the behaviour of our lovely banks. No, let’s just have a calming philosophical discussion about the complications of competition in markets.

Economists like to give us the impression competition is a fabulous thing in any market, all upside and no downside. Competition is something you can never have enough of, they imply.

Don’t believe it. It’s certainly true that a market with no competition – a monopoly – isn’t a great place. Prices are high, service is bad, and when you complain to the company, no one gives a rat’s.

But it doesn’t follow that all competition is wonderful, nor that more is always better. Far from it.

The simple “neo-classical” model of markets assumes a large number of small sellers. The competition between them is so fierce that none of them dares charge a price that’s a cent more than the minimum needed to cover their costs (including the cost of the capital invested in the business, aka profit).

All sellers charge the same price, and if you try selling for a bit more, you sell nothing and go bankrupt.

In the real world, it ain’t so simple. There are various reasons for this, but a big one is the presence of economies of scale – the more you produce, the lower the average cost of what you’re producing.

This allows you to lower your price – which is good for buyers – but, as a consequence, sell a lot more, which is also good for you.

It’s scale economies that explain why so many of our real-world markets are the opposite of what textbooks assume: a small number of large sellers – known as oligopoly. The big four banks are a good example.

When you look at the behaviour of oligopolies you see competition isn’t as wonderful as it’s cracked up to be. Oligopolists compete fiercely against each other, but they compete mainly for market share, and try to avoid competing on price.

According to the economists’ basic model, however, low prices are the key benefit competition brings us. In reality, oligopolists prefer to keep prices and profit margins high by competing via marketing and advertising, including by “differentiating” their products.

Occasionally a firm tries to steal a march on its competitors by innovation – coming up with a product that’s clearly better than the others. Mainly, however, product differentiation involves superficial differences.

Economists preach the virtues of competition because they assume it gives consumers a wider range of products to choose from, which must be a good thing.

But with only a few sellers, competition tends to do the reverse, limiting the choice available. Each firm will have a product range remarkably similar to the others.

This is because the few big firms focus on each other, not the customers. Their goal is not so much to find the magic product the punters will love, as to make sure their competitors don’t get ahead of them. So product ranges tend to be the same.

But how do we explain those two bankers claiming competition prevented them from ceasing dodgy practices? Why wouldn’t a bank want to get itself a reputation for being square with its customers?

Because of another weakness in the economists’ basic model: its assumption that both buyers and sellers know all they need to know about market conditions - an implicit assumption that gaining the knowledge you need to make good choices is easy and costless.

In reality, it costs time and money to be well-informed, which gives sellers (who tend always to be in the market) an inbuilt advantage over buyers, who tend to buy a new car, or change houses, only occasionally.

The first economists to starting thinking such thoughts just a few decades ago ended up winning Nobel prizes for realising that information is “asymmetric”, with sellers usually knowing a lot more than buyers.

In the two cases from the royal commission, the banks and their car dealers and mortgage brokers know about the conflicts of interest caused by their commission arrangements, but customers don’t.

Should one bank decide to stop playing that game, many of its dealers or brokers would have taken their business elsewhere long before the nation’s customers realised it was more trustworthy than its competitors.

Up-to-date economists see this as a class of “market failure” called a “collective action problem”: all the firms in a market realise they’re doing something wrong, or even profit-reducing, but no one’s game to be the first to stop.

The obvious solution is for the government to intervene and ban the practice, letting everyone off the hook at the same time - just as ASIC has decided to do in the case of flex commissions for car dealers. Sometimes competition needs help from a visible hand.

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Who's ripping it off? Competition theory and reality

Puzzling over the rich economies' poor productivity improvement and weak wage growth (but healthy profits), American economists are pointing the finger at reduced competition between firms. But can this explain Australia's similar story?

Jim Minifie, of the Grattan Institute, set out to answer this in his report, Competition in Australia.

Economists regard strong competition between businesses as essential to ensuring market economies function well, to the benefit of consumers and workers.

Competition is what economic theory says stops us being ripped off by the capitalists. Firms that overcharge for their products lose business to firms that undercut them.

So competition pushes prices down towards costs (which economists – but not accountants – define as including the "cost of capital", or "normal profit", the minimum rate of profit needed to induce firms to stay in the market).

Competition helps ensure that economic resources - land, labour and (physical) capital – move to the uses most valued by consumers.

Competition also encourages firms to come up with new or better products – or less costly ways of producing a product – in the hope of higher profits. But those that succeed in this soon find their competitors copying their ideas, and bidding down the price to get a bigger slice of the action.

The innovations improve the economy's productivity (output per unit of input), but competition soon takes away the higher profits, delivering them into the hands of consumers, who often get better products for lower prices.

That's the theory. Question is, to what extent does it hold in practice? And does it hold less in recent years than it used to?

The simple theory assumes any market has a large number of sellers, each too small to be able to influence the market price. In practice, however, many of our markets are dominated by two, three or four big firms.

Why? Mainly because of the presence of economies of scale. It's very common that the more you produce of something – up to a point – the less each unit costs.

So, it makes great sense to have a small number of big firms doing much of the production – provided competition ensures most of the cost saving is passed on to customers in lower prices. Which, as a general rule, it has been over the decades.

Trouble is, big firms do have some degree of control over prices. And it's common for the few big firms in an industry to come to an unspoken agreement to compete using advertising or product differentiation, but not price.

Firms can increase their pricing power by taking over their competitors to get a bigger share of the market. It's the role of "competition policy" – run in our case by the Australian Competition and Consumer Commission – to prevent overt collusion between firms, and takeovers intended to increase market power. But how well is that working?

"Natural monopolies" – where it simply wouldn't make economic sense for more than one firm to serve a particular market, such as rival sets of power lines running down a street, or two service stations in a small town - are another common departure from the theoretical model.

So, what did Minifie find in his study of competition in practice? He found evidence it had lessened in the United States, but not here.

He found plenty of markets where a few firms did most of the business. But "the market shares of large firms in concentrated sectors are not much higher in Australia than in other countries [of comparable size], and they have not grown much lately," he says.

Nor have their revenues (sales) grown faster than gross domestic product. The profitability of firms – profits relative to funds invested - hasn't risen much since 2000.

Minifie identifies eight industries characterised by natural monopoly (in descending order of size): electricity transmission and distribution, wired telecom, rail freight, airports, toll roads, water transport terminals, ports and pipelines.

Then there are nine industries where large economies of scale mean they're dominated by a few firms: supermarkets, wireless telecom, domestic airlines, then (of roughly equal size) internet service providers, pathology services, newspapers, petrol retailing, liquor retailing and diagnostic imaging.

Next are eight industries subject to heavy regulation by government: banks, residential aged care, general insurance, life insurance, taxis, pharmacies, health insurance and casinos.

(Often, these industries are heavily regulated for sound public policy reasons, but the regulation often acts as a barrier to new firms entering the market, thus allowing them to be dominated by a few firms.)

But note this: by Minifie's calculations, natural monopolies account for only about 3 per cent of "gross value added" (a variant of GDP), while high scale-economies industries account for 5 per cent and heavily regulated industries for 7 per cent.

So that means the parts of the economy where "barriers to entry" limit competitive pressure make up about 15 per cent of the economy. Then there are 29 industries with low barriers to entry making up the rest of the "non-tradables" private sector, and about half the whole economy.

That leaves the tradables sector (export and import-competing industries) accounting for 14 per cent of the economy and the public sector making up the last 20 per cent.

Even so, Minifie confirms that, in industries dominated by a few firms, many firms make "super-normal" profits – those in excess of what's needed to keep them in the industry.

By his estimates, up to half the total profits in the supermarket industry are super-normal. In banking it's about 17 per cent.

Other companies and sectors with substantial super profits include Telstra, some big-city airports, liquor retailers, internet service providers, sports betting agencies and private health insurers.

Comparing this last list with the lists of natural monopolies and heavily regulated industries suggests governments could be doing a much better job of ensuring the regulators haven't been captured by the companies being regulated.

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Big business influence wanes as public rejects ‘bizonomics’

The collapse of the "neoliberal consensus" is as apparent in Oz as it is in Trump's America and Brexitting Britain, but our big-business people are taking a while to twig that their power to influence government policy has waned.

Their trouble is the way the era of micro-economic reform initiated by the Hawke-Keating government in the 1980s eventually degenerated into "bizonomics" – the pseudo-economic belief that what's good for big business is good for the economy.

Part of this is the belief that when you privatise a government-owned business, or outsource the delivery of government services to for-profit providers – when you move economic assets and activity from the "public" column to the "private" column – you've self-evidently raised economic efficiency and wellbeing.

Provoking an engrossing debate between economists, Dr Mike Keating, a top economic adviser in the (no relation) Keating era, used a post and a rejoinder on John Menadue's blogsite to claim the early reformers believed that who owned a business wasn't as important as whether privatising it would make its industry more competitive or less.

True, Mike. Trouble is, the advisers and ministers who followed the Keating² era weren't so discerning, nor so scrupulous.

In those days, the goal of making industries more "competitive" meant turning up the competition from imports, or removing government regulation designed to inhibited competition between local players.

These days, following the degeneration to bizonomics, making industry more competitive means granting concessions to make chief executives' lives easier.

I remember when part of the Keatings' motive for dismantling protection against imports was to cure Australia's lazy business people of their predilection for running to Canberra for help whenever times got tough.

No more rent-seeking, was the cry. But the degeneration from economics to bizonomics amounted to wholesale rent-seeking by business. Is productivity improvement weak? Obviously, that's the government's fault for not pressing on with economic reform.

What reform? Cutting tax on companies and high income-earners and increasing the tax on consumers. Shifting the legislative power balance between employers and their workers even further in favour of employers.

Sorry, but as has been well demonstrated by Malcolm Turnbull's refusal to increase the goods and services tax, his inability to cut the company tax rate for big business, and the public's overwhelming disapproval of the Fair Work Commission's decision to cut Sunday penalty rates (complete with the Coalition's attempt to deny paternity of the bastard child), those days are ending.

These days, it's not just leftie troublemakers who doubt that benefits going direct to big business will trickle down to the rest of us, it's every punter in the street.

Another element of bizonomics is governments in many anglophone countries maintaining the facade, but not the substance, of business regulation.

They tell the public it's protected by laws governing treatment of consumers, employees, shareholders, taxpayers and others, but then rob the regulatory agencies – in our case the ACCC, Fair Work Ombudsman, ASIC and the Tax Office – of the resources they need to adequately enforce the laws they administer.

In this game of nudging and winking, it didn't take long for business to realise that, its chances of apprehension being tiny, obeying any law it found standing in the way of higher profits was now optional.

And that, though they could never admit it, this was the way governments of both colours secretly wanted it to be.

This is what explains the plethora of business law-breaking being uncovered by Fairfax's Adele Ferguson and other investigative journalists. What's notable is the way the business lobby groups have failed to condemn corporate lawbreaking.

A few decades of bizonomics have left our big business chiefs with the assurance they possess a God-given right to have their every demand accommodated by governments.

Sorry guys, apart from the lack of evidence that allowing you to aggrandise yourselves leaves the rest of us better off, democracies don't work that way.

In the end, power derives from voting punters, not corporations making generous donations to party coffers. The donations work only as long as the pollies can use them to amass enough votes for a government trying to swing it for biz business.

That's what's no longer happening, and the sooner you wake up to it, the sooner you can move to profit-making Plan B: find it within your business, not by lobbying Canberra.

The pollies have already got the punters' message. That's why the Coalition is becoming less willing to do your bidding and Labor has realised getting tough with business has more upside than down.

If this means you stop donating to either side, so much the better.

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Reduced competition may be slowing US growth

US financial markets may be betting that the Trump administration's budget policies will stimulate economic growth and inflation, but they're cheered by this prospect only because of deeper fears that America and the advanced economies have entered an era of persistently weak growth.

America's rate of growth has been slowing for decades, starting long before the onset of the global financial crisis.

As part of this, America's rate of productivity improvement has been weakening, despite a short-lived uptick in the 1990s.

So the hunt's been on for factors that may be causing this slowdown. There are many suspects. But one you often see mentioned by economists such as Professor Paul Krugman is a decline in the strength of competition in many American markets.

If markets are significantly less competitive, you'd expect this to mean consumer prices that are higher than they might be, profits that are higher, less innovation, slower productivity improvement, worsening inequality and slower growth.

But what's the evidence of reduced competitive pressure? Earlier this year President Obama's Council of Economic Advisers issued a paper reviewing the evidence, which I'll summarise.

There are various ways to measure the degree of "concentration" in an industry – that is, how much of the business done by an industry is captured by a small number of large firms.

Figures collected by the US Census Bureau show that, over the 15 years to 2012, the share of total sales revenue earned by the 50 largest firms in 13 broad industry categories fell in three, was unchanged in one but increased in nine.

If 50 sounds like a lot of firms, remember this is America, whose economy is about 12 times bigger than ours.

Sales concentration was highest among utilities – electricity, gas and water – at 69 per cent, which isn't surprising considering many are natural monopolies. Even so, concentration increased by almost 5 percentage points.

After that came finance and insurance, where concentration was up by 10 percentage points to more than 48 per cent, followed by transportation and warehousing (up more than 11 points to 42 per cent) and retail trade (up 11 points to 37 per cent).

This picture is confirmed by studies of specific industries, the briefing paper says. One study of the national market for loans found that, over the 30 years to 2010, the top 10 banks' market share increased by 20 points to 50 per cent.

For deposits, the market share increased from 20 per cent to almost 50 per cent.

Another study found that, for hospital markets over the decade to 2006, a common measure of concentration increased by about 50 per cent, to a degree equivalent to having just three equal-sized competitors in a market.

A different measure of possibly reduced competition comes from looking at what's happened to the rates of profitability of big firms.

When researchers take the rates of return on invested capital for listed US companies, then rank them from highest to lowest, they find that for firms at the 90th percentile (that is, 10 per cent down from the top; 90 per cent up from the bottom) their rate of return is five times higher than for the median (dead middle) firms.

A quarter of a century ago, the 90th percentile firms' rate of return was closer to twice the median firms'.

This suggests some firms are better able to extract "economic rent" than they were. Economic rent is the profit you make that exceeds what you'd need to earn to be willing to remain in the industry.

Yet another indication comes from the "long-term downward trend in business dynamism", as indicated by a steady decline since the late 1970s in the proportion of new firms entering markets each year.

This is while the proportion of firms exiting markets each year has been little changed. Since the entry rate has now fallen to be equal to the exit rate, the total number of firms – which used to grow by about 6 per cent a year – is now unchanging.

Part of the explanation for the decline in the number of new firms could be rising "barriers to entry" into many industries.

This could be caused by increased federal, state or local licensing requirements, ever-rising economies of scale or data-mining information advantages to incumbent firms, or successful lobbying for government rules to protect against new entrants.

Labour market dynamism – how often workers change employers – has also declined since the 1970s.

This could have many causes, including no-poaching agreements between employers and greatly increased occupational licensing, which limits people's freedom to move between states.

The briefing paper notes it's not yet clear how these various indicators suggesting the US may be suffering a fall in competition within its markets fit together.

Turning to possible causes of reduced competition, it notes the problem of "common ownership". Researchers have argued that institutional investors who are large owners of the biggest firms in a particular industry, implicitly encourage those firms not to compete with each other, thus raising the investors' profits.

According to other research, the role of institutional investors has grown over the past 30 years so that, in 2014, they controlled 61 per cent of worldwide investment assets.

One anti-competitive development the briefing paper doesn't mention is the US Congress's willingness to keep extending the lives of existing and future patents and copyright.

Meanwhile, US government trade negotiators use bilateral preferential trade deals – going by the Orwellian name of "free trade agreements" – and plurilateral deals such as the Trans-Pacific Partnership agreement to press partners like us to extend the lives of our patents and copyright to fit with the Yanks' domestic arrangements.

Maybe one reason economic growth is slowing is that the world's multinational corporations are getting too good at finding ways to inhibit competition between them, including by enlisting the help of governments.

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The best economists know the market is flawed

As almost every economist will tell you, the market economy – the capitalist system, if you prefer – works in a way that's almost miraculous. All of us owe our present prosperity to it.

Think of it: each of us in the marketplace – whether we're buyers or sellers, consumers or producers – is acting in our own interests. A butcher sells us meat not to do us a favour, but to make a living. We, in turn, buy our meat from him not to do him a favour, but to feed ourselves.

That's how market economies work: everyone seeks to advance their own interests without regard for the interests of others. It ought to produce chaos, but doesn't.

Somehow the market's "invisible hand" has taken all our selfish motivations and transformed them into an orderly, smooth-working system from which we all benefit. The butcher makes her living; we get the meat we need.

Heard that story before? It contains much truth. But not the whole truth. Business people, economists and politicians often use it to imply that everything that happens in a market economy is wonderful.

Or they use it to argue that the best way to get the most out of a market economy is to keep it as free as possible from intervention by meddling governments. We should keep government as small as possible and taxes as low as possible.

But market economies aren't always orderly and smooth working. They move through cycles of wonderful booms but terrible busts.

And it's not true that "all things work together for good". A fair bit of the self-seeking behaviour of producers isn't miraculously converted into consumer benefit.

I've been reading a book called Phishing for Phools, a play on the online practice of phishing: posing as a reputable company to trick people into disclosing personal information.

The authors say that "if business people behave in the purely selfish and self-serving way that economic theory assumes, our free-market system tends to spawn manipulation and deception.

"The problem is not that there are a lot of evil people. Most people play by the rules and are just trying to make a good living. But, inevitably, the competitive pressures for businessmen to practice deception and manipulation in free markets lead us to buy, and pay too much for, products that we do not need; to work at jobs that give us little purpose; and to wonder why our lives have gone amiss."

You're probably not terribly surprised to read such sentiments. The surprise is that they're being expressed by two economics professors, George Akerlof, of the University of California, Berkeley (and husband of the chair of the US Federal Reserve), and Robert Shiller, of Yale University, who are held in such high regard by their peers that they're separate winners of the Nobel prize in economics.

They say they wrote the book as admirers of the free-market system, but hoping to help people better find their way in it.

If competition between business people too often induces them to manipulate their customers, why do we so often fall for it? Because though economists assume we always act in our own best interest, psychologists have convincingly demonstrated that people frequently make decisions that aren't in their best interest.

The market often gives people what they think they want rather what they really want. The authors point to common market outcomes that can't possibly be wanted.

One is a high degree of personal financial insecurity. "Most adults, even in rich countries, go to bed at night worried about how to pay the bills," they say. Too many people find it too hard to always resist the blandishments of marketers so as to live easily within their budgets.

It was all the phishing for phools in financial markets – people were sold houses they couldn't afford; people sold securities that weren't as safe as they were professed to be – that led to the global financial crisis and the Great Recession that hurt so many.

Then there's the way processed foods from supermarkets and food sold by fast-food outlets and restaurants come laced with the health-harming things they know we love: salt, fat and sugar.

The authors say a great deal of phishing comes from supplying us with misleading or erroneous information. "There are two ways to make money. The first is the honest way: give customers something they value at $1; produce it for less.

"But another way is to give customers false information or induce them to reach a false conclusion so they think that what they are getting for $1 is worth that, even though it is actually worth less."

Another class of phishing involves playing psychological tricks on us. According to the research of the American psychologist Robert Cialdini, we're phishable because we want to reciprocate gifts and favours, because we want to be nice to people we like, because we don't want to disobey authority, because we tend to follow others in deciding how to behave, because we want our decisions to be internally consistent, and because we are averse to taking losses.

There's no better way to organise an economy than by using markets. But market outcomes are often far from perfect and we need governments to regulate them as well as offset some of their worst effects.

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Let’s not repeat our many competition stuff-ups

The belief that increased competition leads to greater efficiency and higher productivity is one of the articles of faith for admission to the economic priesthood.

Economic practitioners often know little about the peculiarities of particular markets – about their specific areas of market failure – and often don't think they need to know because what they do know about is their profession's two magic answers to inefficiency.

The first is to "get the incentives right" (the claimed rationale for much tax reform) and the second is to increase competitive pressure.

There's a lot of truth to both propositions, but not as much as it suits economists to believe. Because it comes from their model of markets, many economists' belief that the more competition the better – and the more choice the better – is so deeply ingrained it requires no empirical confirmation.

This makes economists chronic sufferers from what psychologists call "confirmation bias" – they make a mental note of all the examples they see that seem to confirm their pre-existing views about how the economy works, but quickly forget those examples that don't.

So when the Turnbull government confidently asserts that implementing the many recommendations of Professor Ian Harper's review of competition policy will do much to lift the economy's rate of productivity improvement, few economists are inclined to demur.

Many of the reforms Harper proposes make much sense: ending the protection of chemists, coastal shipping and the owners of taxi licences and intellectual property, rationalising the pricing regimes for roads and water, and changing to an "effects test" in trade practices law.

Initially, Harper wanted deregulation of liquor licensing laws, but pulled back when economists who did know about the market failures in the area showed him evidence of the significant "negative social externalities​" (e.g. people getting bashed outside pubs) associated with alcohol consumption. Who knew?

Unfortunately, Harper's church-going ways haven't helped him appreciate the potentially adverse effects on family life – family life? Why would an economist know or care about family life? – arising from further deregulation of retail trading hours.

We'll see how many of Harper's braver proposals are actually implemented. In any case, most of them are up to the premiers, not the feds.

But the most potentially alarming is Harper's proposal that the principles of competition policy be extended to the domain of "human services" – healthcare, education and community services – which is mainly the responsibility of the states.

There's no denying that health and education are areas of huge government spending and economic significance, replete with inefficiencies and ineffectiveness. They ought to be much higher on the reform agenda than yet more tinkering with the tax system and the wage-fixing rules.

But to frame them as part of competition policy is an old economists' trick: take an area that's always been outside the marketplace and marketise​ it. Take the world as it is and make it more like the textbook assumes it to be.

Apply the economists' two magic answers – getting the incentives right and introducing competition and choice – and everything will fix itself without the economists ever needing to come to grips with the causes of the particular inefficiencies that are causing the problem.

Brilliant. But often disastrous. Think of the string of stuff-ups that have followed the econocrats' efforts to contract-out the provision of government services.

Think of the allegations of widespread rorting by operators of the job services network that replaced the Commonwealth Employment Service.

Think of the way contracting-out of childcare services allowed the rise and collapse of ABC Learning, at great cost and inconvenience to parents and taxpayers.

Think of last week's collapse of Vocation Ltd and the much wider rorting of the misguided experiment with profit-motivated provision of higher education. Federal and state "reformers" are totally stuffing up vocational education in response to the problems with TAFE.

Think of all the money federal taxpayers have pumped into private schools in the sacred name of choice, without any evidence of this wider competition leading to higher standards of education on either side of the fence.

Think of all the effort put into the MySchool website to promote choice and competition while our scores continue to slide on the international indicators of literacy and numeracy.

Even the pink batts scheme is an example of the disaster – and death – that can follow when you naively give profit-motivated business people a pipeline into government coffers.

Sorry, econocrats. If you want to achieve genuine improvements in the delivery of health and education and community services, you'll have to try a mighty lot harder than applying magic answers.

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Competition does have its drawbacks

Competition is billed by economists as a wonderful thing, the invisible restrainer of a capitalist economy and essential to ensuring consumers get a good deal.

But many economists aren't as conscious as they should be that competition has costs as well as benefits.

It's true, of course, that monopoly is usually a terrible thing, allowing arrogant, inflexible behaviour on the part of producers, with little pressure on them to keep prices down or to provide much choice. Dealing with government departments shows you what monopolies are like.

Economists tend to assume the more competition the better and that customers can never get too much choice. But this shows how – despite their loud protestations to the contrary – their thinking is excessively influenced by their most basic, least realistic model of "perfect competition".

Psychological experiments show that when shoppers face too much choice, they tend to avoid making a decision. That's because the information they need to make informed choices isn't freely available and because the human mind hasn't evolved to be good at choosing between more than two items with differing characteristics.

Many real-world markets are characterised by oligopoly: a few large firms accounting for most of the sales. Oligopolies make economic sense because they're needed to fully exploit economies of scale (which are assumed away under perfect competition). So, in reality, competition and scale economies are in conflict.

In oligopolies and even in markets with a relatively large number of producers, competition is blunted by product differentiation, much of which is cosmetic. As with most advertising, product differentiation is intended to induce consumers to make decisions on an emotional rather than rational basis.

Phoney differentiation is also intended to frustrate rational comparison. It's not by chance that it's almost impossible to compare mobile phone contracts.

When economists speak of competition, they're usually thinking of competition on price. But though oligopolists watch their competitors like hawks, they much prefer to avoid price competition, competing rather via advertising, marketing, packaging and other differentiation.

Mackay's Law of competition states that the key to competition is to focus on the customer, not your competitor. But this is what oligopolists don't do.

In the real world – including the media – competitor-oriented competition is rife. This robs customers of genuine choice. It's a form of risk aversion: if I do the same as my competitor, I minimise the risk of him beating me.

It's what, in Harold Hotelling's classic example, prompts two ice-cream sellers to be back-to-back in the middle of the beach, regardless of whether some other positioning would serve customers better. It explains why business economists' forecasts tend to cluster, usually around the official forecast.

In his book The Darwin Economy, Robert Frank, of Cornell University, argues that lefties tend to see inadequate competition as the most prevalent form of market failure, whereas it's actually "collective action problems".

A collective action problem arises when the players in a market realise they're doing something mutually destructive, but no one's game to stop doing it for fear of being creamed by their competitors.

Usually in commercial markets the only answer is for the government to intervene and impose a solution on all players; for which they're grateful.

However, that's no help to our political parties, which have got themselves locked in a game of ever-declining standards of behaviour they don't know how to escape from. It's collective action problems that make it so easy for the politicians to manipulate the media.

The advocates of federalism believe it's good to have the states free to be different and competing against each other. In reality, the competition is mainly negative. The states compete to attract foreign investors with special tax concessions and the foreigners play them off against each other.

In the early 1970s, the McMahon government transferred its payroll tax to the states to give them the "growth tax" they needed to cover their growing spending. In the decades since then, they've done little but compete with the others by raising their tax-free thresholds and cutting their rates.

The huge increase in federal grants to private schools over recent decades was justified as increasing parents' choice and imposing competitive pressure on public schools. There's little evidence it's worked, nor much even that it's held down private school fees.

Similarly, Julia Gillard's My School website, with all its information about the academic performance of particular schools, intended to increase competition between them, has failed to produce any increase in the proportion of students achieving national minimum standards in reading, writing and numeracy over the five years to 2014.

Depending on circumstances, competition can make things better or worse – or little different.

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How digital disruption allows higher prices

Do you think much about the process involved when you decide to buy something some seller is offering you? If you're like most consumers, probably not. But the businesses doing the selling do, which ought to be a warning.

And the study of exchange – the buying and selling of goods and services – is the central element of economics. Economists long ago concluded they had it all figured.

Trouble is, the digital revolution is changing the way sellers behave when we buy things online or use the internet to check out the choice before deciding what to buy.

These hidden changes are revealed in the eye-opening book, All You Can Pay, by former Fairfax Media journalist Anna Bernasek and her husband, D. T. Mongan.

None of us wants to pay more than we have to to buy the things we decide we need. But the great insight of economists is that we'd often be prepared to pay more for something we want than we're required to.

The difference between what we're willing to pay and what we actually have to is known to economists as the "consumer surplus". It's a measure of how much better off the purchase has left us.
The more successful competition is in holding down the market price, the greater is our consumer surplus and thus the more we've gained from living in a market economy.

By the same token, sellers are often able to sell their wares for a higher price than the minimum at which they'd be willing to sell. This difference is the "producer surplus". The smaller the producer surplus, the more competition in the market is advancing the interests of consumers.

It's obvious that producers would like their surplus to be as great as possible. The history of the modern market economy is the story of how businesses have discovered ways of increasing that surplus even while competition between them has been working to keep it small.

For most of the past century we lived in the era of mass-produced consumer goods, as epitomised by Henry Ford. He invented the production line as a way of more fully exploiting economies of scale and keeping the price of his cars as low as possible.

The lower the price, he reasoned, the more people who could afford a car. And the more cars he sold, the higher his profits. To keep costs and prices low he produced just one kind of car, in one colour, black.

But, as Bernasek and Mongan record, Ford was eventually overtaken by General Motors, pursuing a different strategy of selling a range of models at differing prices, aimed at different segments of the market. GM even started changing each model slightly every year.

This "product differentiation" involved selling more than just a car: style, fashionability, social status, even self-expression. From an economist's perspective, however, it was about gaining the freedom to charge a higher price, making the "market price" harder to discern, reducing consumer surplus and increasing producer surplus.

If each consumer has their own price they're willing to pay, the ideal from a profit-maximising producer's perspective is to charge each individual a price that matches their willingness to pay. That some people would pay a price much lower than others are paying won't matter provided you're getting as much as you can out of each of them.

Trouble is, how do you know how much a person is willing to pay? You don't. But for years many businesses have practiced various forms of "price discrimination" involving charging broad categories of customers higher prices than others.

Cinemas, for instance, charge adults more than children. Airlines charge business travellers more than holidaying families. They do this not out of the goodness of their hearts, but to maximise their producer surplus.

But this is where the online revolution is making it a lot easier for sellers to assess the willingness to pay of particular customers. The more information they have on file about you – your age, sex, address, occupation and record of previous purchases – the more accurately they can estimate how much they can get away with charging you.

The authors explain that the trend to "customisation" is actually a way of asking you to disclose more about what you're looking for, giving the seller greater control over what you're offered and at what price.

Chain stores' loyalty cards are primarily a way of gathering information about your buying habits and preferences. If I know you invariably buy brand X, I know I don't need to offer you a lower price.

These days, prices are often framed as discount off what's purported to be the usual price. But how do you know the price wasn't bumped up before it was discounted? And how do you know the discount you're being offered isn't lower than others are getting?

Most of us still do only some of our shopping online rather than in stores, so it's early days for the trends Bernasek and Mongan see emerging.

But it's not hard to believe it's getting ever easier for businesses to convert consumer surplus to producer surplus by charging us more than they used to.

The more prices become personalised, the harder it becomes to know the actual market price – even the average price – customers are paying. If that day dawns, the benefits of living in a market economy will be greatly reduced.

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Micro reform: what Treasury wants to change

Under its newish secretary, John Fraser, Treasury has a new slogan. It is proud to be "fiscally conservative, market-oriented and reform-driven". So just what reform does Treasury advocate?

Well, in a speech last week Fraser spelt it out. But first he noted that the key element of market-oriented reform is that it almost always involves heightening competition. He illustrated the point by summarising what happened during the golden age of micro-economic reform in the 1980s and '90s.

When business speaks of the need for Australian firms to be more competitive, it usually means  the government should do something that makes it easier for firms to compete with their foreign rivals.

But this is the opposite of what economists mean when they see heightened competition as the key driver of improved economic performance. They mean Australian firms should be forced to improve their own performance by exposing them to greater competition with other Aussie firms and by making it easier for foreign firms to compete with them.

As Fraser explains, competition is at the heart of how market economies are organised. "Competitive markets generally deliver benefits for all Australians in a way that sheltered markets fail to do so," he says.

"Effective competition in our economy is a key part of its strength and dynamism. Competitive markets benefit consumers by putting downward pressure on prices.

"And over time, competitive pressures drive innovation and investment in new technologies and the development of new products and quality services that meet the needs of consumers. This process of innovation is what drives economic growth and improvements in living standards in the long term."

The modern era of opening Australia to greater pressure from the world economy began when Gough Whitlam cut import tariffs in 1973, he says.

Successive tariff cuts in the '80s and '90s "put Australian manufacturing under increased competitive pressure but, behind the border, changes gave manufacturers flexibility to respond".

Significant among these changes were financial market deregulation and the move to enterprise bargaining, as well as the oft-forgotten reductions to the top personal marginal tax rate from a 60 per cent in 1985-86, to 47 per cent in 1990-91, Fraser says.

The process of reform culminated with the agreement across all levels of government to form the "national competition policy" that began in 1995 and ran through to 2005.

Government businesses were restructured to make them more commercially focused. The electricity, gas, water and rail sectors were transformed.

Legislation was reviewed so it enhanced rather than restricted competition. And a national access regime was established for essential infrastructure. That is, the public or private owners of monopoly networks were obliged to make them available to competitors at reasonable prices.

"Where creativity was once stifled by regulation, competition in product and service markets drove management to change work practices. A liberalised financial sector and a sound macro-economic environment supported strong investment."

Fraser says this era of huge changes offers three lessons on how to get policy reforms accepted.

"First, it was a holistic set of structural reforms. This is important because winners and losers differed and all Australians benefited from at least some of these reforms.

Second, in order to achieve reform we built a political consensus and, more importantly, a community consensus that things had to change and that a delay would make matters worse.

Third, the business community – both large and small – was a big part of this changing culture.
"Managers, no longer distracted by currying [for] government protection, were better able to focus outwards on new markets and inwards on cost savings."

So what's on Treasury's latest reform to-do list? Tax reform, for one. Then there's the financial system. Australia's banking system is relatively concentrated by international standards and the Murray financial system inquiry recommended that regulators increase the emphasis on competition relative to their other objectives.

Then, labour market reform. "I am heartened by Peter Harris and the Productivity Commission's report on workplace relations. Genuine reform  ... can be expected to have positive effects on employment and productivity and to reduce business compliance costs."

Next, competition laws. "It is important that firms that have market power are not able to use that position to exclude competitors and potential competitors. This is why we have competition laws."

The review of competition  by Professor Ian Harper found that current  laws need to be overhauled to make them fit for purpose.

"There remain substantial restrictions on who can supply goods and services, including: professional licensing requirements, liquor and gambling regulation, media and broadcasting restrictions , and the well-known issues of pharmacies and taxis," Fraser says.

"There are restrictions on what can be supplied through product standards, agricultural marketing boards, parallel import restrictions and intellectual property protections. And restrictions on where and when supply can occur: air service agreements, retail trading hours restrictions, and planning and zoning rules."

Fraser concedes that the goal here should not always be deregulation. Regulations are often justified to pursue social goals. "But these goals should be approached through better regulation that doesn't have the side effect of curtailing competition.

"To my mind, foremost among this list, for immediate economic bang for the buck, is planning and zoning."

Planning and zoning systems may create excessive barriers to the entry of new businesses  by limiting  number and size of outlets and  types of business models permissible.

"In other areas, the challenge for governments is not so much to reform regulation as to make way for 'digital disruption'. Uber  connects passengers with drivers and AirBnB  connects travellers with spaces.

"We should welcome competition here too – governments should not be too quick to assume they will always be better regulators than the private sector."

Clearly, Fraser has an ambitious agenda. It's different to mine, but sometimes my duty is to make sure you know what the econocrats are thinking.

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Economic chaos of Whitlam years not all his fault

Gough Whitlam was a giant among men who changed Australia forever - and did it in just three years. No argument. The question is whether the benefits of his many reforms exceeded their considerable economic costs.

The answers we've had this week have veered from one extreme to the other. To Whitlam's legion of adoring fans - many of whom, like many members of his ministry, have never managed to generate much understanding or interest in economics - any economic issues at the time aren't worth remembering.

To his bitter, unforgiving critics - led by former Treasury secretary John Stone - his changes were of dubious benefit, in no way making up for the economic chaos he brought down upon us.

The truth is somewhere in the middle.

To his many social reforms must be added a few of lasting economic benefit: diplomatic and trading relations with China, the Trade Practices Act with its first serious attack on anti-competitive business practices and - the one so many forget - the Industries Assistance Commission, whose efforts over many years led eventually to the end of protection against imports, removed by the next Labor government.

Not all of his many social reforms have survived. The Hawke-Keating government removed remaining vestiges of his non-means-tested age pension and ended the failed experiment with free university education, which did little to raise the proportion of poor kids going to university, but cost a fortune and delivered a windfall to the middle class at the expense of many workers.

The best modern assessment of the Big Man's economic performance comes in the chapter by John O'Mahony, of Deloitte Access Economics, in The Whitlam Legacy, edited by Troy Bramston.

O'Mahony's review of the economic statistics tells part of the story: "The years of the Whitlam government saw the economic growth rate halve, unemployment double and inflation triple".

But that conceals a wild ride. By mid-1975, inflation hit 17.6 per cent and wage rises hit 32.9 per cent. The economy boomed in 1973 and the first half of '74, but then suffered a severe recession.

From an economic perspective, Whitlam did two main things. He hugely increased government spending - and, hence, the size of government - by an amazing 6 percentage points of gross domestic product in just three years.

Some have assumed this led to huge budget deficits. It didn't. Most of the increased spending was covered by massive bracket creep as prices and wages exploded.

Many of Whitlam's new spending programs should have come under his predecessors and would have happened eventually. Some can be defended as adding to the economy's human capital and productive infrastructure, others were no more than a recognition that our private affluence needn't be accompanied by public squalor.

From this distance it's hard to believe that in 1972 large parts of our capital cities were unsewered. That's the kind of backwardness Whitlam inherited.

The Whitlam government's second key economic action was to pile on top of high inflation huge additional costs to employers through equal pay, a fourth week of annual leave, a 17.5 per cent annual leave loading and much else.

Clyde Cameron, Whitlam's minister for labour, simply refused to accept that the cost of labour could possibly influence employers' decisions about how much labour they used.

From today's perspective, there's nothing radical about equal pay or four weeks' leave. But to do it all so quickly and in such an inflationary environment was disastrous.

When the inevitable happened and Treasury and the Reserve Bank jammed on the brakes and precipitated a recession, Labor's rabble of a 27-person cabinet concluded the econocrats had stabbed them in the back, panicked and began reflating like mad.

What Labor's True Believers don't want to accept is that the inexperience, impatience and indiscipline with which the Whitlam government changed Australia forever, and for the better, cost a lot of ordinary workers their jobs. Many would have spent months, even a year or more without employment.

But what the Whitlam haters forget is that Labor had the misfortune to inherit government just as all the developed economies were about to cross a fault-line dividing the postwar Golden Age of automatic growth and full employment from today's world of always high unemployment and obsession with economic stabilisation.

Thirty years of simple Keynesian policies and unceasing intervention in markets were about to bring to the developed world the previously impossible problem of "stagflation" - simultaneous high inflation and high unemployment - that no economist knew how to fix, not even the omniscient and infallible John Stone.

It was 30 years in the making, but it was precipitated by the Americans' use of inflation to pay for the Vietnam war, the consequent breakdown of the postwar Bretton Woods system of fixed exchange rates, the worldwide rural commodities boom and the first OPEC oil shock, which worsened both inflation and unemployment.

The developed world was plunged into dysfunction. The economics profession took years to figure out what had gone wrong and what policies would restore stability. Money supply targeting was tried and abandoned.

The innocents in the Whitlam government had no idea what had hit them; that all the rules of the economic game had changed. The point is that any government would have emerged from the 1970s with a bad economic record.

Malcolm Fraser had no idea the rules had changed, either. His economic record over the following seven years was equally unimpressive.

It took the rest of the developed world about a decade to get back to low inflation and lower unemployment. It took us about two decades. I blame the Whitlam government's inexperience, impatience and indiscipline for a fair bit of that extra decade.

My strongest feeling is that when the electorate leaves one side of politics in the wilderness for 23 years it's asking for trouble. It's Time to give the others a turn after no more than a decade.

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Abbott's choice: competition v cronies

It's still too soon to tell whether Tony Abbott's government is pro-market or pro-business, but so far the evidence for the latter stacks higher than that for the former.

The difference turns on whether the pollies want markets where effective competition ensures benefits to consumers are maximised and excessive profits minimised, or markets where government intervenes to limit competition - often under the cover of claiming to be protecting jobs - and makes life easier for favoured businesses.

Will we see more rent-seeking or less under Abbott, more of what The Economist calls "crony capitalism"?

Will firms or industries with rival interests do better from government regulation if they're more generous donors to party coffers?

Abbott and his ministers' intemperate attacks on the Australian National University for its decision to "divest" itself of a few million mining company shares for environmental or ethical reasons are a worrying sign.

Investors shouldn't enjoy freedom to choose where they invest, regardless of their reasons? ANU is different from the rest of us even though its investment funds come largely from private donations and bequests? This from a government keen to complete the de facto privatisation of universities?

What is ANU's offence? Bringing ethical considerations into investment? Or sounding like it believes climate change is real and we should be doing something real about it?

Abbott attacked ANU's decision as "stupid" and believes "coal is good for humanity, coal is good for prosperity, coal is an essential part of our economic future".

If ever there was an industry whose early decline could be confidently predicted - as it is being by hard-headed investors and bankers the world over - it's steaming coal.

Yet Abbott seems keen to change the rules of the formerly supposed bipartisan renewable energy target in ways that, by breaking long-standing commitments to the renewables industry, would cost it billions and blight the future of its employees, all to provide the government's coal and electricity industry mates with temporary relief from the inevitable.

The biggest problem with governments "picking winners" is that they quickly regress to picking losers, helping industries against which technology and other forces have shifted to resist the market's pressure for change that would - almost invariably - make consumers and the economy better off.

The proposals of the recent draft report of Professor Ian Harper's competition policy review could do much to strengthen the market's ability to deliver benefits to consumers and roll back decades of accumulated rent-seeking and crony capitalism.

The enthusiasm with which the Abbott government takes up those proposals will tell us much about its choice between being pro market forces or pro certain generous business donors to party funds.

A particular area where sound competitive principles have been secondary to special pleading from various interests is the regulation of intellectual property, such as patents, copyright, trademarks and plant breeder rights. Harper says our intellectual property regime is a priority for review.

IP isn't God-given, it's a government intervention in the market to limit competition with owners of the patents and so forth for a limited period. It's a response to market failure where the "public goods" characteristics of IP would otherwise generate too little monetary incentive for people to come up with the new knowledge and ideas that benefit us all.

In other words, it's a delicate trade-off between government-granted monopolies to encourage innovation, and competition to keep prices and excess profits down.

This makes it ripe for rent-seeking: pressuring politicians to extend the monopoly periods retrospectively (despite the lack of public benefit), to allow loopholes that permit phoney "ever-greening" of drug patents that would otherwise expire, to limit poor countries' access to life-saving drugs at realistic prices and to ignore blatant gaming of IP laws by two-bit operators that have never created anything.

Most of these excesses are at their worst in the United States with its easily bought legislature. The information revolution has made IP one of America's chief export earners. And the free-trade preaching Yanks have made advancing the interest of their IP exporters their chief priority in trade negotiations such as the present Trans Pacific Partnership deal.

As always, we have a tendency to give the Yanks whatever they want. Trouble is, as Harper points out, Australia is and always will be (and should be, given our comparative advantage in world trade) a net importer of intellectual property.

Abbott has a further temptation to be less than vigilant in pursuing Team Australia's best interests: his chief media cheerleader, News Corp, happens to be the twin brother of a primary beneficiary of the Yanks' efforts to advance the interests of their IP exporters, 21st Century Fox.

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Competition is a wonderful thing - up to a point

The older I get the more sceptical I become. Goes with being a journo, I guess. I've become ever-more aware that no one and nothing is perfect. Not political leaders, not parties, not any -isms, not even motherhood.

Take competition. Economists portray it as the magic answer to almost everything, but the more I see of it, the more conscious I become of its drawbacks and limitations.

Which is not to say I don't believe in it. Far from it. We could use a lot more competition than we've got. But only in the right places and for the right reasons.

The recent draft report of the review of competition policy, chaired by emeritus professor Ian Harper, argues that we need to step up the degree of competition in the economy if we're to cope with three big sets of challenges and opportunities that we face: the rise of Asia, our ageing population and the advent of disruptive digital technologies.

Dead right - up to a point.

We need more competition in the economy because it's what keeps the capitalist system working in the interests of the populace, not the capitalists. But that doesn't mean it makes obvious sense to take areas of our lives that have been outside the realm of the market and turn them over to the capitalists.

Economics is about efficient materialism; making sure the natural, man-made and human resources available to us are used in ways that yield maximum satisfaction of our material wants. It argues that economies based on private ownership and freely operating markets - "capitalist" economies - are the most efficient.

What's to stop the capitalists using markets to exploit us and further aggrandise themselves? Competition. Competition between themselves, but also between us (the consumers) and them (the producers).

Get this: the ideology of conventional economics holds that the chief beneficiaries of market economies should be, and will be, the consumers, not the capitalists.

Market economies are seen as almost a con trick on capitalists: they scheme away trying to maximise their profits at our expense, but the system always defeats them, shifting the benefits to consumers (in the form of better products and lower prices) and leaving the capitalists with profits no higher than is necessary to keep them in the game.

What it is that performs this miracle? Competition. It's not nearly as fanciful as it sounds. Since the industrial revolution, the history of capitalism is the history of capitalists latching on to one new technology after another, hoping for the killing that never materialises.

Take the latest, digital technology and its effect on my industry, news. Who's losing? The formerly mighty producers of the soon to be superseded newspaper technology, including many of their journalists and other workers. Who's winning? People wanting access to as much news as possible as cheaply as possible.

For good measure, the cost of advertising - reflected in the prices of most things we buy - is now a fraction of what it was. Tough luck for producers, good luck for consumers. Competition at work.

But, amazing though this process is, it's far from perfect. Competition doesn't work as well in practice as it does in theory, for many reasons. A big one is "information asymmetry" - producers know far more about products than consumers do. Another is the presence of economies of scale, which has led to most markets being dominated by a handful of big companies.

Perhaps most pernicious, however, is the success of some producers in persuading governments to protect them from the full rigours of competition. Some industry lobbies are particularly powerful, and the ever-rising cost of the election arms race has made the two big parties susceptible to the viewpoints of generous donors.

The report produced by Harper, a former economics professor, emphasises that competitive pressure needs to be enhanced for the ultimate benefit of consumers. With so many big companies enjoying so much power in their markets, we need laws against anti-competitive practices. He proposes refinements to make these laws more effective.

He points to industries where governments need to reform laws that limit competition at the expense of customers: retail pharmacies, taxis and coastal shipping. He advocates "cost-reflective road pricing" and an end to restrictions on "parallel imports" of books, recordings, software and so on (fear not, the internet's doing it for us) and local zoning laws that implicitly favour incumbents (Woolies and Coles, for instance) at the expense of new entrants (Aldi and Costco).

But, predictably, there's little acknowledgement that competition has costs as well as benefits. It's assumed that if some choice is good, more must be better. And competition-caused efficiency outweighs all social considerations.

So the report advocates liberalising liquor licensing, and deregulation of shopping hours on all but three holy days a year (the holiest being Anzac Day), without any serious consideration of the effects on sobriety and crime in the first case or family life, relationships and what I like to call re-creation in the second.

Similarly, it sees nothing but benefit in maximising choice and competition between schools, and wants much more outsourcing of the delivery of government-funded services to profit-motivated providers.

The inquiry we need is one to check how well previous experiments in mixing government funding with the profit motive - in childcare, for instance, or training courses for international students - have worked in practice. We need more evaluation and fewer happy economist assumptions.

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